Faculty Sponsor: Xiaoxue Zhao

Abstract:

The project aims to empirically assess how political connections and corrupt informal favors between local governments and firms impact the distribution of government procurement contracts in China. Specifically, it seeks to understand how adopting the open bidding method alters the identities of contracting firms and lowers procurement prices for local governments.

One key empirical challenge in determining the causal effects of open bidding is that the choice of this method by local governments may be heavily influenced by the characteristics of both the contract and the local government, making it highly endogenous. To address this, the project plans to utilize the discontinuous variation in procurement methods introduced by China’s public procurement regulations. These regulations specify that contracts exceeding a certain monetary amount must use the open bidding process. Therefore, the project can employ a regression discontinuity (RD) approach to compare outcomes of procurement contracts above and below the threshold, allowing for the identification of the causal effects of open bidding.

The extent of corruption is measured by the political connections of the contracting firms and the prices paid by local governments for procurement items. In the first stage, the RD analysis indicates that reaching the legal thresholds significantly increases the likelihood of using the open bidding method. In the second stage, the RD results show that open bidding can indeed reduce the product prices in procurement.